What is the meaning of the phrase owner’s equity?
Owner’s equity is the major component in accounting equation and balance sheet. It can be calculated by reducing the owner’s withdrawal amount from the owner’s investment and add it to the net income of the business. In mathematical terms, owner’s equity is the sum of assets subtracted by the sum of liabilities.
The owners are the stockholders. They purchase the issues published by company as proof of contributed capital or ownership interest. Thus, the term owner’s equity is also referred as stockholders equity. The profit of the business will increase not because of the owner’s contribution but when the owner’s share increases. If there is an increase in the owner’s contribution it, is called as revenue and the reduction is termed as loan. It is the straight result of accounting period concept and realization concept.
In brief, the realization concept is divided into two sections; they are delivering economic services and manufacture of economic goods. If there is any doubt arises in these elements, it will not allow the accountant to treat the sale value as realized income. An important legal element between these two is the right to acquire money for the goods or service delivered.
The goods are exchanged in a promise that the party would pay for it. The supplier of goods should finalize the deal before settling his goods to the party. The purchasing party will get the full rights of the goods once he pays the considerable amount to the supplier. The collection of money is a special process that earns profit and return of the capital amount invested to manufacture the unit.
The Role of Stockholder’s Equity on Financial Balance Sheet
Owner’s equity is the last and important section present in the balance sheet. The difference between the sum of assets and sum of liabilities is the owner’s equity. The categories in owner’s equity include treasury stock, retained earnings, accrued comprehensive income and paid in capital.
The paid in capital highlights the total amount invested by the shareholders in the corporation. If it is either preferred or common stock, it is said to be least risky.
The retained earnings is the leftover amount after dividends is paid, which it is reinvested into the corporation. At certain times, the company will buy shares from its stock, and it will be documented under treasury stock category on the company balance sheet. In simple terms, treasury stock is referred when the company purchases their stock. The sold treasury stock will be recorded in supplementary paid in the account. All the losses and gains, that are not recognized clearly, are displayed under accrued comprehensive income category. It includes loans that customers are yet to pay, pension costs, income taxes, and other cumulative foreign currency.
As owner’s equity is completely recorded, the balance sheet would reflect the position of the company. You can analyze the yearly progress using these information. If a business is run by a single owner, then it will have one equity account and if it is a partnership firm each will have their account.